Outlook grim for states' finances

Report warns that economic recovery won't end fiscal woes

July 18, 2012 12:00 AM

By Mary Williams Walsh and Michael Cooper The New York Times

WASHINGTON -- The fiscal crisis for states will persist long after the economy rebounds, as states confront financial problems that include rising health care costs, underfunded pensions, ignored infrastructure needs, eroding revenues and expected federal budget cuts, according to a report issued Tuesday by a task force of respected budget experts.

The severity of the long-term problems facing states is often masked by lax state budget laws and opaque accounting practices, according to the report, an independent analysis of six states released in Washington by a group calling itself the State Budget Crisis Task Force.

The report said the financial collapse of 2008, which caused the most serious fiscal crisis for states since the Great Depression, exposed a number of deep-set financial challenges that will grow worse if no action is taken by national policymakers.

"The ability of the states to meet their obligations to public employees, to creditors and most critically to the education and well-being of their citizens is threatened," warned the task force's two chairmen, former New York Lt. Gov. Richard Ravitch and former Federal Reserve chairman Paul A. Volcker.

The report added a strong dose of fiscal pessimism just as many states have seen their immediate budget pressures ease for the first time in years. It also called into question how states will be able to restore the services and jobs they cut during the downturn, saying the loss of jobs in prisons, hospitals, courts and agencies had been more severe than in any of the past nine recessions.

"This is a fundamental shift in the way governments have responded to recessions and appears to signal a willingness to 'unbuild' state government in a way that has not been done before," the report said, noting that court systems had cut hours in more than a dozen states, delaying actions including divorce settlements and criminal trials.

The report arrived at a delicate political moment. States are deciding whether to expand their Medicaid programs to cover the uninsured poor as part of the new health care law -- an added expense some are balking at, even though the federal government has pledged to pay the full cost for the first few years and 90 percent after that.

Meanwhile, many public-sector unions feel besieged, as states and cities from Wisconsin to San Jose, Calif., have moved to save money on pensions.

And Washington's focus on deficit reduction -- and a series of big budget cuts scheduled to occur after the fall election -- has made cuts to state aid inevitable, many governors believe. If federal grants to the states were cut by just 10 percent, the report calculated, the loss to state and local government budgets would be more than $60 billion a year -- which it said would be nearly twice the size of the combined tax increases that states enacted from 2008 to 2011 in response to their deepest fiscal crisis in more than 50 years.

Even before the recession, Medicaid spending was growing faster than state revenues, and the downturn caused even higher caseloads, making the program the biggest single share of state spending, as many states have cut aid to schools and universities.

States do not have enough money set aside to cover the health and retirement benefits they owe their workers. Important revenue sources are being eroded: States are losing billions of sales tax dollars to Internet sales and to an economy in which much consumer spending has shifted from buying goods to buying lightly taxed services. Gas tax revenues have not kept up with urgent infrastructure needs. And distressed cities and counties pose challenges to states.

While almost all states are required by law to balance their budgets each year, the report said many have relied on gimmicks and nonrecurring revenues in recent years to mask the continuing imbalance between the revenues they take in and the expenses they face in the short term and long term .

The report focused on California, Illinois, New Jersey, New York, Texas and Virginia, and found that all have relied on some gimmicks in recent years to balance their budgets.

In Pennsylvania, Gov. Tom Corbett has been talking about the state's looming fiscal problems since before he took office in January 2011. He pointed to the state's use of federal stimulus money to pay for recurring costs.

Mr. Corbett has pushed through two lean state budgets, the first one making substantial cuts to university subsidies and the second passed last month that held those subsidies to the same level as the previous year. Because of stagnant state revenue, the Legislature approved a budget of $28.05 billion for 2010-11; $27.14 billion for 2011-12; and $27.66 for 2012-13.

"Both during the campaign and as governor, Gov. Corbett talked about [previous Gov.] Ed Rendell's irresponsible spending of stimulus dollars that helped create a $4.2 billion deficit last year," said Corbett spokesman Kevin Harley. "We're still feeling the effects of that irresponsible spending by Rendell."

When desperate officials search for money to balance their budgets, they often see public pension funds as an almost-irresistible pool of money. A common way to "borrow" pension funds is not to make each year's required government contribution.

The task force found that from 2007 to 2011, state and local governments had shortchanged pension plans by more than $50 billion, an amount that has nothing to do with 2008 market losses, which caused even more harm.